Cardinal Fastener piques the interest of potential buyers

Cardinal Fastener & Specialty Co. plans to emerge from Chapter 11 bankruptcy protection and remain a significant supplier of bolts to the wind energy industry, its president says. But the company in Bedford Heights likely will have a big new investor — if not a new owner — when the reorganization process is finished.
Cardinal filed for Chapter 11 June 30, and has revealed in court papers that it's talking to at least four possible buyers that have expressed interest in the company. One is an unidentified German company that visited Cardinal last Thursday, July 7, to conduct due diligence. Cardinal said in the filings that this potential bidder might serve a stalking horse to help set a price for a sale of the company, though the German company ultimately could buy Cardinal outright.
Cardinal president John Grabner said he hopes and expects to stay on, even if the company is sold, and he believes other employees and company officers will remain as well.
“From everything anyone has told us, they want to buy Cardinal for its people and its culture,” Mr. Grabner said in an interview last week. “It's not just the equipment.”
Mr. Grabner's first choice, though, is to recapitalize the company with the help of an outside investor, rather than sell it. Cardinal officials are talking with at least three potential investors as well as buyers, according to Mr. Grabner and court documents.
Cardinal is up and running with about 20 employees now, Mr. Grabner said, though that's less than half its employment level before the Chapter 11 filing in U.S. Bankruptcy Court in Cleveland. Court documents indicate the company had been maintaining its facilities with a skeleton staff of employees, friends and family members of Mr. Grabner who volunteered their time, even as Cardinal temporarily suspended the bulk of its manufacturing operations.
That situation lasted only a few days, while Cardinal and its chief lender, Wells Fargo, haggled over whether the company could access its cash accounts with the bank, Mr. Grabner said. Once an agreement was reached last Tuesday, July 5, to allow Cardinal to access those funds, manufacturing operations resumed, Mr. Grabner said.

The troubles

But employment at the company is still way down. It had about 50 employees before filing for bankruptcy and had 64 at its peak in 2010, Mr. Grabner said. In between, a lack of access to working capital caused the company to shrink employment and kept Cardinal from growing the way it wanted, especially in the wind industry, he said.
Most employees were told to go home June 17, when Wells Fargo pulled Cardinal's line of credit and cut off Cardinal's access to its cash with the bank, leaving the company unable to make payroll, according to court filings. Cardinal owes Wells Fargo about $1.16 million, bankruptcy documents show.
For its part, Wells Fargo was reacting to Cardinal's violation of some of its loan covenants, including a failure to meet profitability standards required under its loan agreement, court documents state. Wells Fargo in August 2010 cited Cardinal for being in default, the company told the Bankruptcy Court, but the manufacturer was able to work with the bank under a forbearance agreement until May of this year. It was then that Wells Fargo reduced the amount of money Cardinal could borrow as well as the amount of cash the company could be advanced based on the value of its machinery and equipment.
“As a result, Cardinal entered into an over-advanced position under the working capital line of credit as of May 30, 2011,” Cardinal wrote in a June 30 motion. “Based on this default condition, Wells ceased providing additional advances and prohibited Cardinal from using the proceeds from its cash collections. Throughout this time, Cardinal never missed a payment of principal or interest to Wells Fargo.”
But Cardinal might have done something worse, as court documents show it made a significant accounting error that affected both the valuation of the company and its profitability.
According to the company's court filings, Cardinal had to reclassify $1.7 million in inventory as “property, plant and equipment” and had to reclassify another $1 million in inventory as expenses related to the company's expansion into the wind energy industry.
Cardinal informed Wells Fargo of the accounting issues in May. That month, the bank indicated it wanted to liquidate Cardinal's assets to collect on its loans to the company and began sweeping money out of Cardinal's accounts, “leaving Cardinal largely unable to pay day-to-day business expenses,” according to a court filing. In mid-June, Cardinal was unable to pay employees, causing it to lay off 34 workers and to idle its plant.

Back up and running

Since then, however, the two sides have reached an agreement under which Cardinal again can access its cash with the bank and can resume operations under a mutually agreed-upon budget, said Christopher Meyer, an attorney with Squire, Sanders & Dempsey in Cleveland who represents Wells Fargo in the case.
As to what caused Cardinal to fall out of compliance with its loan covenants in the first place, Mr. Grabner said it was general business conditions and not the result of either the accounting error or a lack of growth or profitability in its wind business.
“We were the only company, apparently, to lose money in 2009,” Mr. Grabner quipped, jokingly
referring to a year in which many, if not most, American manufacturers lost money as the economy dove into a deep recession.
Cardinal's court documents state that its wind business continued to grow, driving overall company sales growth of 38% in 2010 compared with 2009. Mr. Grabner said while foreign competition is affecting some aspects of the wind industry, he so far has not seen it in the bolts business.
“To the best of my knowledge, there are no Chinese fasteners in these things,” he said.
“The problem isn't the wind industry or federal policies” related to that industry, Mr. Grabner said. “It's more an issue of the banking environment in our country. … Banks are not supporting small businesses.”
Mr. Meyer tells a different story. He said both business conditions and the accounting problem contributed to Wells Fargo's decision to move on Cardinal and to seek a liquidation of its assets.
“It's not just a question of an accounting snafu,” Mr. Meyer said. “There were defaults under the lending agreement related to their operations.”
However, Mr. Grabner said the losses took place in 2009 and were small. The company since has returned to and maintained its profitability, he said.
“We're positive cash flow, we have been positive cash flow, and we have profitable operations,” Mr. Grabner said.

Bright past, hopeful future

Nonetheless, the company's present situation is a far cry from just two years ago.
President Barack Obama visited Cardinal in 2009 and held it out as an example of a U.S. manufacturer lifted by the nation's increasing development of wind energy. In its Chapter 11 filing, Cardinal notes that, after the visit by President Obama, “Cardinal became a national face for American manufacturing and job growth.”
In 2010, the company was named “Supplier of the Year” by the American Wind Energy Association.
Now, time will tell if Cardinal can reclaim that role.
One reason buyers and investors are interested, Mr. Grabner said, is because they say they want Cardinal's position in the wind industry. That position tends to rely upon local or regional suppliers whenever it can, giving Cardinal a strong opportunity to grow further in the American wind energy market.
Mr. Grabner said he hopes the bankruptcy will be short.
“My goal is to run the company and continue to build it and to make sure everyone gets paid from this,” he said.
Mr. Meyer said a short bankruptcy probably would make creditors happy as well.
“I hope it's not going to be a long, drawn-out bankruptcy,” Mr. Meyer said. “It's in everyone's interest to preserve the value of the company.”